State owners sell Germany's HSH Nordbank to buyout groups

HAMBURG (Reuters) - A consortium of buyout groups will pay around a billion euros for Germany’s HSH Nordbank [HSH.UL], once the world’s largest ship financier, as it emerges from crippling writedowns and state bailouts triggered by the deepest sector slump on record.

The bank’s regional government owners said on Wednesday they had sealed the sale to buyout groups Cerberus and J.C. Flowers, with investors GoldenTree, Centaurus Capital and Austrian bank BAWAG (BAWG.VI) also taking stakes.

The purchase price for 94.9 percent of HSH - which will be renamed upon closing - was roughly 1 billion euros (£884 million), they said.

The buyers had been in exclusive talks since mid-January with HSH’s owners, the German regional states of Schleswig-Holstein and Hamburg, and regional savings banks.

J.C. Flowers already held a 5 percent stake, the remainder of a 27 percent share that the investor bought in 2006 for 1.3 billion euros, which was diluted through the injection of state capital.

HSH became the world’s largest lender to the shipping industry in the 2000s. But it needed two state rescues after a slump in its sector caused by the global financial crisis and over-capacity among shipping firms.

Hamburg and Schleswig-Holstein bailed out HSH with 3 billion euros in equity and a 10 billion-euro guarantee in 2009. The guarantee was cut to 7 billion euros in 2011, but HSH asked for it to be returned to the original level in 2013.

The guarantee will now be withdrawn and the purchase price may be reduced after a final assessment of remaining risks, the sellers said, adding no risks would remain with them.

The states said total losses they incurred in their HSH investment would range from 10.8 billion to a maximum of 14 billion euros.

Under European Union state-aid rules, the privatisation needed to be finalised by the end of February.

Because HSH will need to meet EU criteria for the validity of its business model after a sale, it will be sold without the bad loans of less than 7 billion euros held by its internal “bad bank”. Those are being sold separately at discounted prices.

Private equity groups typically cut costs at companies they buy, intending to increase earnings and then sell them on for a higher price. Cerberus and J.C. Flowers will be looking to re-sell HSH in about seven years, sources close to the matter have said.

In the medium term, one in three HSH jobs is at risk after the privatisation, the sources have said.

HSH COMEBACK

Like its peers, HSH has benefited from the first signs of recovery in the shipping market in recent months. It has been restructuring since the financial crisis, cutting its balance sheet from 205 billion euros in 2007 to 76 billion in September 2017 and slashing staff to 1,960 from 4,750.

At the end of 2016, HSH no longer ranked among the world’s top 15 ship lenders, as banks such as DNB (DNB.OL), Bank of China (601988.SS) and China Exim took the lead.

Before the financial crisis, HSH - like other German public-sector banks called landesbanks - took on large amounts of debt, anticipating the expiry of a rule that allowed for generous refinancing because it had state backers.

HSH used the money to double its ship loan portfolio to 40 billion euros and to put 30 billion into credit investments, many of which turned sour in the financial crisis.

HSH’s former executive board has stood trial on charges including accounting fraud, one of the first cases of a European bank’s entire executive board being tried for actions taken in the run-up to the financial crisis.

In 2016, Germany’s Federal Court of Justice reversed a decision to acquit the ex-managers, handing the case back to a regional court, which is expected to re-open proceedings next year.